Fed raises key interest rate and sees possible acceleration in hikes


Fed raises key interest rate and sees possible acceleration in hikes

Federal Reserve Chairman Jerome Powell speaks following the Federal Open Market Committee meeting in Washington

Federal Reserve Chairman Jerome Powell speaks following the Federal Open Market Committee meeting in Washington

Overnight, the Federal Reserve lifted the USA benchmark lending rate by 0.25 per cent in a widely expected move - to a range between 1.75 and 2 per cent.

The FOMC statement stressed that rising interest rates were unlikely to derail economic growth - which the committee now characterises as "strong" rather than "moderate" - and again made clear the Fed had some tolerance for inflation above its 2 per cent target.

That also means cardholders soon will be forking over even more money in interest payments annually, an estimated $2.2 billion alone for what's expected to be the Federal Reserve's second rate hike of the year, according to the June Credit Card Debt Report from CompareCards.

The central bank also signaled two more hikes are coming in 2018 and four in 2019, a possible sign of concern about accelerating inflation in the US.

The Fed expects inflation to overshoot its target faster than it previously thought, prompting it to raise its forecast for rate hikes this year.

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

But, he added, "We really don't see it in the numbers".

Trump's imposition of tariffs on steel and aluminum imports has enraged US allies. Unemployment, now at an 18-year low of 3.8 per cent, would drop to 3.6 per cent by year's end and to 3.5 per cent in 2019 and 2020 - levels not seen in 49 years.

Economists had predicted the Fed would make this change to overcome the common view that the central bank will not change the benchmark interest rate at a meeting that does not include a press conference, which limits its options.

Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating. Should the Fed's expectations prove accurate, its rate policy would then be meant to slow the economy.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent.

Beginning in 2008 in the midst of the financial crisis, the Fed had kept its key rate unchanged at a record low near zero for seven years.

The Fed anticipates that inflation will overshoot its 2% target this year; in March, officials saw that happening only in 2020.

Fed officials have begun to debate publicly how close the economy is to overheating. But if it miscalculates and overdoes the credit tightening, it can trigger a recession.

The Fed's meeting this week is to be followed by policy meetings of two other major central banks - the European Central Bank on Thursday and the Bank of Japan on Friday.

The current economic expansion is the second-longest in USA history, and will set a record if it lasts a bit more than a year longer. All those countries have vowed to retaliate against any US tariffs with their own penalties against USA goods.